TIA’s Exam MFE Blog

It appears that the real-world probability is actually 102%.  I messed up the formula in my spreadsheet at home.  My apologies.

I have created lessons regarding the new material (for those at my live seminar, that’s “Unit 13″) about valuing a claim on S^a.  Unfortunately, it appears that they have not yet been edited.  I apologize for this.

Day is going to be bringing the printed problem sets with him to my seminar Thursday, so those of you who are concerned you haven’t received anything have nothing to worry about.  Apparently we have a deal with Kinko’s.

Here is the projected schedule:

Each day we will begin at 8am, break for lunch, and continue until the daily material is finished.  I expect that we will finish before 5pm each night, but regardless, we will definitely stop at 6pm.  Sunday, I expect to finish by noon.  There are 10 practice problems in each unit, and each evening you will be given 20 practice problems to work on your own if you so desire.  Depending on demand, a “study hall” may be made available as well each evening.

Thursday Morning, Units 1-3:

Unit 1:              Basic put-call parity; duality between a call and a put, and an application to currency options.

Unit 2:              American options, and implications regarding early exercise from put-call parity; properties of option prices based on the no-arbitrage model.

Unit 3:              The basic 1-period binomial stock model.

Thursday Afternoon, Units 4-6:

Unit 4:              The basic multi-period binomial stock model.

Unit 5:              The basic binomial model for alternative assets, and alternative binomial models.

Unit 6:              Additional topics for binomial models:  real-world return, discrete dividends, and estimating volatility.

Friday Morning, Units 7-9 (or 10):

Unit 7:              The Black-Scholes formula.

Unit 8:              The Greeks, elasticity, the Sharpe ratio, and implied volatility.

Unit 9:              Exotic Options, Part 1:  exchange options and gap options.

Friday Afternoon, Units 10 (or 11)-13:

Unit 10:            Exotic Options, Part 2:  Asian options, barrier options, and compound options.

Unit 11:            An introduction to stochastic differential equations.

Unit 12:            Ito’s Lemma.

Unit 13:            A way around Ito’s Lemma in common special cases, and valuing a claim on S^a.

Saturday Morning, Units 14-16 (or 17):

Unit 14:            An introduction to discrete interest-rate models.

Unit 15:            The Black-Derman-Toy interest-rate model.

Unit 16:            The Black Formula and valuing a caplet or floorlet.

Saturday Afternoon, Units 17 (or 18)-20:

Unit 17:            The “impossible” interest-rate model; the Vasicek and CIR interest-rate models.

Unit 18:            The Basics of Delta-Hedging (and the delta-gamma approximation).

Unit 19:            The profit formula for a hedged portfolio.

Unit 20:            Pep talk and 2-minute drill.

Sunday Morning:

Thursday evening practice problems (1-20).

Friday evening practice problems (21-40).

Saturday evening practice problems (41-60).

For those of you coming to the live seminar:  I am hoping to have e-mailed to you (via Day) about 200 problems to bring with.  I also recommend bringing the McDonald text, a calculator and whatever normal other study materials you normally have handy (pens/pencils, paper…).  I intend to start each morning at 8am sharp and to run no later than 6pm (Thursday, Friday, and Saturday) and noon (Sunday) if at all possible.

A few of you have discovered errors in problem set E.1.3.

#6:  Should have S1(0) = 2

#7:  Final solution should read

…so that means S₂(6) ~ N(1.33, 0.9216) + N(0.2, 0.5) = N(1.53, 1.4216) because of independence.

(Changes in bold italics)

#8:  rho should be +0.5, not +0.4

I will be on vacation out of town and may not have access to this blog for the next week.  I apologize to those of you who have e-mailed questions in the past week, and will get to them shortly after I return.

Bill Cross

I don’t know if you are aware, but at the end of each chapter, there’s a section for “Problem Sets” which contain sets of 10 problems for most of the lectures which are probably much closer to what the SOA is likely to ask on a test.  I was made aware that not everyone knows about these, so I thought I should alert you.

As Day has already mentioned, apparently many of you have sent e-mails to me to which I haven’t responded.  This is because I haven’t received them.  They didn’t even make it to my spam folder.  For whatever reason, the aol address to which they were supposed to be forwarded was either blocking them or not receiving them.  Earlier this week, Day made me aware that several of you had been sending me e-mails with no response, to which I was (in sequence) surprised (at the information), frustrated (at the failure of the technology involved) and then chagrined (at myself, for not being more aware of what was happening).

Obviously, ever since Al Gore invented this thing we call the “interweb”, those “little tubes” get plugged up once in awhile.  Ever since my hard drive crashed last summer, there have been issues with e-mail; we think we have the problem fixed, now.  Earlier this week, I created a new gmail address for myself (cross.mfe.tia@gmail.com) which should be linking properly to my old e-mail address and other forms of contact.

That said, however, I definitely owe an apology to all of you for not becoming aware of the situation sooner.  I am teaching FM and M/FE at IUPUI, a local university, on top of my work for TIA and my primary job at Conseco, and became distracted.  I should have been concerned that I had received very few questions about the course to date.  Instead, I obliviously focused my time on other things.  Or, to mix animal and sensory metaphors, I “didn’t hear the dog that didn’t bark in the night” because I was too busy “not looking a gift horse in the mouth”.

I would appreciate it if, on top of the testing that James, Day, and I have done, anyone who wishes would contact me - even if you don’t have a question about the course, just to “ping” me, to provide some reassurance that I am no longer cut out of the loop.  Rest assured, I intend to be more vigilant from here on out.

Again, I apologize for not becoming aware of the situation sooner.

Bill Cross

I have been told that some emails sent to Bill from our Contact Us page have received no replies.  I am aware of this and will fix this issue as this is a technical glitch involving SPAM filters and PC configurations.  If you are in waiting for a question to be answered, you might try emailing Bill directly at x@theinfiniteactuary.com where x = bill.  Sorry for the troubles.  Let me know if there are any other issues that I can help you with.  You can always send me an email at the same address but with x = day.  Thanks!

I have submitted changes to fix Exam 2, problem 1 and Exam 3, Problems 9 and 10.  Exam 3, Problem 8 was fine.

Also, my spreadsheet for the “Black Formula” problems contained an error - I submitted changes to fix those Monday, although they may not have been fixed on the website.  The work is fine except for the final answer - in the spreadsheet, I was multiplying K by P(1,2) rather than P(0,1).

Edited to add:  I guess I had already mentioned this in a previous post.  To be specific, the problems involved are

Exam 5, #19

Exam 6, #20

Exam 7, #9

Exam 8, #19

I have been alerted to potential problems in practice exam 3 (#s 8-10).  The written solution may be incorrect; I’m not sure whether I fixed it in the videos.

Also, in the problems in the homework (section H.2), the section H quiz, and the Black Formula problems in practice exams 5-8, I made a mistake in my spreadsheet; basically, in the final formula I multiplied K by P(1,2) instead of by P(0,1), so none of the final answers are correct (although everything up to the final step should be fine).

I plan to have these fixed in the next day or two.

Bill Cross